Master Financial Statement Analysis: Strategies for Success
School
EDHEC Business School, Roubaix**We aren't endorsed by this school
Course
HUMAN RESO 100
Subject
Accounting
Date
Dec 11, 2024
Pages
6
Uploaded by UltraBoarPerson1221
M1 BM24_M1_LI_BM_S1_CCO_ACC_6515FINANCIAL STATEMENT ANALYSISFINAL EXAM – December 15, 2023Professors : R. BARUAH / M. GEORGES / C. GREVET H. HALEY / E. SALAMEH / A. VEZINDURATION : 2 hoursINSTRUCTIONS:FOUR APPENDICES ATTACHED TO THE END OF THE PRESENT EXAM PAPERDOCUMENTS NOT ALLOWED ANY TYPE OF CALCULATOR ALLOWEDPLEASE ANSWER ON THE ANSWER SHEET PROVIDEDGood luck on your exam!The FSA FacultyPage 1/6STUDENT CODE:
Part 1: ASPEN plc ( 7 marks)Launched in the year 2000, the Irish company Aspen plc designs and manufacturescomplete parts for car manufacturers. The company focuses on green, safe andconnected technologies. Since 2000, its intelligent exterior systems and fuel emissions control systems have rapidlygained market acceptance, and shipments to customers have increased dramatically.Since environmental concerns are at the heart of the transformation of the automotiveindustry, Aspen is preparing for significant increases in production, which also involveshigh investment. Management notes that despite increasing profits the cash balance hasdeclined, and it is forced to nearly double its debt financing in the current year. You are required to advise management as to specific causes of the cash deficiency andhow to remedy the situation.ASSETS20222021CLAIMS20222021Cash500640Trade payables 630600Account Receivables860550Deferred income tax5745Inventories935790Other current liabilities8578Prepaid expenses250Total current liabilities772723Total current assets2 3201 980Patents1400Less accumulated amortization(10)Long-term debt1 650850Patents, net1300Total non-current liabilities1 650850PPE2 6501 950Less accumulated depreciation(600)(510)PPE, net2 0501 440Common stock2 0001 800Other assets200175Retained earnings248197Less accumulated depreciation(30)(25)Total Shareholders' Equity2 2481 997Other assets, net170150Total non-current assets2 3501 590Total Assets4 6703 570Total Liabilities and Equity4 6703 570ASPEN plc - Consolidated balance sheet, end year December 31 (€ millions)In addition, the following information is available: Net income for 2022 and 2021 is respectively €160 million and €130 million.Cash dividends paid during 2022 and 2021 are respectively €109 million and €100million.Depreciation expense charged to income during 2022 is €95million. During 2022, the company purchases patents for €140 million in cash. Amortization ofpatents during that year amounts to €10 million.Required: 1. Prepare a statement of cash flows using the indirect method for Year 2022.2. Explain the discrepancy between Year 2022 net income and cash flows fromoperations.3. Describe options available to management to remedy the cash deficiency.Page 2/6
Part 2: Why would you/would you not invest in SavySpend? ( 13 marks)As an intern at a private equity firm, you are looking for a potential investment in theretail sector. You are considering investing in one retailer, SavySpend. However,another retail company, PenyPinch, has also attracted your attention as the two retailershad performed similar to each other over the past two years on the basis of their ReturnOn Equity (ROE). So far, you have analyzed the business model of the two companies. SavySpend’s activities are geographically diverse and cover a wide range of food andnon-food products and services. Its stores are large hypermarkets, typically set in out-of-town locations. In response to the lower attractiveness of the non-food products inthe hypermarkets, SavySpend is implementing corners and shop-in-shops of partnerbrands. The company also offers the opportunity to shop via the internet. The firm has developed home delivery services, increased the number of its drives andlaunched marketplaces. They also encouraged subscription formulas. In 2022,SavySpend delivered group sales of 64.5 billion euros, with growth of 6.76% over theprevious year. The Italian market represented 66% of group sales. A challengingeconomic environment in Italy in the prior years resulted in lower revenue growth thanthe rest of Europe with 9.9 billion euros. Revenues generated from the Asian marketaccounted for 17% of the group total and Asian market results were stronger than forother markets. Since 2019, SavySpend has been deploying the EcoKiki brand whosemodel is similar to the hard discount model. EcoKiki targets both individuals andprofessionals and advertises prices 10% to 15% lower than those of traditionalhypermarkets.PenyPinch's business is geographically concentrated in Denmark and Germany whichtogether drive more than 90% of the firm’s total sales. PenyPinch stores aresupermarkets offering groceries and a wide range of non-food items, typically located incity centers. PenyPinch has leveraged advanced technology such as self-service checkouts and cameras in its stores to manage customer flow and improve efficiency. It hasalso developed partnerships with express delivery pure players. For the five years priorto 2022, PenyPinch's strategy focused on an effort to lower the cost base. The companycould lower some of its selling prices, and still offer value added and more responsibleproducts to customers. The group shows a strong position in the fresh products andorganic market. In 2022, PenyPinch had achieved revenues of more than 30 billioneuros in sales and net income of 1 billion euros.In order to make your investment decision you have to assess SavySpend's financialperformance relying on the information provided in the attached appendices and in theanswer sheet. Make sure to benchmark SavySpend’s performance with PenyPinch'sone when required and/or relevant.Page 3/6
Required: 1.Analyse SavySpend’s ROE versus PenyPinch’s ROE, using the DuPont method: i) Decompose SavySpend and PenyPinch’s ROE for the two years under review.ii) What do you conclude about SavySpend’s performance for Years 2021 and 2022?Justify your thought through each of the three drivers of the ROE formula.2.Analyse SavySpend’s ROE versus PenyPinch’s ROE, using the alternative method: i) Fill in the blanks in the table of the answer sheet that decomposes the ROEalternative.ii) How does the information gleaned from the alternative method calculation changeyour understanding of the SavySpend's performance?3.Using the Appendices 1,2,3 and 4:(i) Analyze SavySpend’s operating profitability versus PenyPinch’s, in the light of thefirm’s respective strategy.(ii)Analyze SavySpend’s productivty versus PenyPinch’s.(iii)Analyze SavySpend liquidity and solvency position versus PenyPinch’s.Your answers to the above questions should reflect your understanding of the firms’strategy.4.To conclude, would you invest in SavySpend? Justify using all relevant information.Page 4/6
Appendix 1: Common Size income statement (as % of sales revenues)Year ended December 312021202220212022Sales 100%100%100%100%Cost of Sales 73.18%73.83%82.37%82.66%Gross profit26.82%26.17%17.63%17.34%Selling General & Administrative expenses 22.11%21.59%11.89%11.72%Other Income, net of Other Expense 0.05%0.03%0.84%0.79%Operating profit (=EBIT) 4.71%4.58%5.73%5.62%Net Interest Expense (Income) 0.91%0.74%0.55%0.47%Earnings from continuing operations, before tax3.79%3.84%5.18%5.15%Income tax expense0.92%0.46%1.43%1.36%Net gains(losses) from discontinued operations (after tax) -0.03%-0.05%-0.18%-0.22%Total Net Income 2.89%3.36%4.42%4.36%PenyPinchSavySpendAppendix 2: Additional information in millions €2021202220212022Sales revenues29 53030 27160 45564 539net interest expense after tax-205 -198 -255 -234 Operating Working Capital (=WCN) -1 153 -1 383 -6 854 -7 756 Net non-current operating assets7 6028 25230 61632 004Net debt1 0099599 0817 625Total assets13 93314 72546 02347 206PenyPinchSavySpendAppendix 3: Key growth rates2021202220212022Annual Sales Growth5.75%2.51%6.23%6.76%Annual Net Income Growth-4.59%19.23%14.10%5.69%PenyPinchSavySpendPage 5/6
Appendix 4: Other ratios2021202220212022Operating Working Capital / Sales-3.9%-4.6%-11.3%-12.0%Operating Working Capital Turnover-25.6-21.9-8.8-8.3Accounts Receivable Turnover41.438.715.214.5Inventory Turnover17.916.818.216.9Accounts Payable Turnover10.19.69.89.2Days' Receivables992425Days' Inventory20222022Days' Payables36383740Net Non-current Assets Turnover3.93.72.02.0PPE Turnover5.55.22.52.6Depreciation & Amortization / Sales3.3%3.1%2.3%2.3%Current Ratio1.271.270.730.68Quick Ratio0.850.830.510.45Cash Ratio0.670.640.260.19Liabilities-to-Equity1.561.492.131.84Debt-to-Equity0.520.460.920.68Debt-to-Capital0.340.310.480.41PenyPinchSavySpend____________END OF EXAM PAPER _______________Merry Christmas and Happy holiday!Page 6/6